UNFI refinances term loan with $500M agreement

United Natural Foods Inc. said it has launched the refinancing of its senior secured term loan facility, following a downgrade of the company’s debt by ratings agency Moody’s last month.

The amended term loan credit facility, expected to close this month, would total $500 million. The amendment is expected to extend the maturity date, modify the interest rate margins applicable to the term loan, and make other modifications to the terms. UNFI said it expects to use the proceeds of the amended term loan, together with borrowings under its asset-based revolving credit facility, to repay the existing term loan.

Moody’s Ratings in late March downgraded UNFI to B3 from B2, citing the company’s “weak credit metrics and negative free cash flow.” The outlook for UNFI’s debt remained “stable.”

In a report accompanying the downgrade, Moody’s said that UNFI’s debt ratio reached 6.6 times EBITDA for the 12 months through Jan. 27, compared with 4.9 times for the year ended July 29, 2023. In addition, the ratio of EBITDA to interest was 0.8 times, compared with 1.4 times in the earlier period.

Moody’s said UNFI’s metrics could improve somewhat in the coming 12 months, although the company will also need to invest “significant capital” to improve its operations in that time. It will also face ongoing profit pressures from supply chain disruptions, reduced volumes from its grocery customers, and high labor costs.

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“We expect the business environment will remain highly competitive, especially for the independent food retailers or small retail grocery chains,” Moody’s said in the report. “These customers are being squeezed by larger, better capitalized traditional supermarkets, such as Kroger Co., and alternative food retailers, such as Walmart, thereby pressuring their growth and profitability.”

Moody’s also cited UNFI’s high concentration of sales with its largest customer, Whole Foods Market, and noted that Whole Foods’ parent company, Amazon, has a “deepening relationship” with SpartanNash, a UNFI competitor. (Amazon has a warrant agreement that could result in Amazon owning 12%-15% of SpartanNash stock by 2027 if certain criteria are met.)

In UNFI’s favor are its size and scale, with $30 billion in revenue and 55 distribution centers, Moody’s said. UNFI also stands to benefit from its leadership in the fast-growing, higher-profit natural and organic industry, the ratings agency said.

“The company is very well positioned to take advantage of the increasing consumer awareness and preference for healthy diets including natural, organic, and gluten-free foods,” Moody’s said. “Total sales of natural, organic, and specialty foods have been increasing faster than traditional grocery across all food retailing channels, and we expect this trend to continue.”

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A Bloomberg report last week said JPMorgan Chase & Co. was seeking investors to refinance at least $600 million of UNFI’s debt, including a term loan due next October. It was not immediately clear if UNFI was planning additional action on its debt, in addition to the refinancing announced Tuesday.

A spokesperson for UNFI was not immediately available for comment.